WEAKNESSES

RISK ASSESSMENT

An economy weakened by the Russian recession, but less so than in 2015

Following the reduction in activity in 2015, largely due to the Russian economic recession, growth in Moldova is expected to recover in 2016. Russia is an important source of revenue for Moldova, thanks to remittances from expatriate workers accounting for a quarter of its GDP, and remains one of the leading destinations for its exports. After suffering during the banking system crisis of 2015, the services sector is expected to sustain growth in 2016. This should come mainly from the financial, corporate services, retail and transport sectors, to the detriment of heavy industry, whose contribution to GDP is declining. The economy is likely to continue suffering from the effects of the banking crisis, which will undermine investor confidence and push the central bank to roll out emergency funding to recapitalise the system, thus reducing funds scheduled for public investments. In this context, household consumption will suffer, with fewer loans being granted, a decline in remittances from expatriate workers and a high rate of inflation, even if the minimum wage does go up.

In 2015, inflation climbed sharply because of the depreciation of the leu (higher import costs). In 2016, inflation will remain below the 5% target of the central bank.

Deterioration in public and current accounts

The budget deficit deepened in 2015 because of the slowdown in activity and is expected to stabilise in 2016. The government is likely to freeze so-called non-essential spending following the decision of the IMF and the European institutions to suspend the provision of finance. The corruption scandal that emerged in 2015 is likely to have negative repercussions on public finances because the missing 1 billion dollars (12.5% of GDP) has not been returned and could become part of the public debt. In addition, the three banks that hold the majority of the country’s assets, are becoming increasingly vulnerable because of the increasing rate of their non-performing loans and their very weak capitalisation and are looking for State support, which poses a risk for public finances.

The current account deteriorated in 2015. Despite the rise of the leu against the Russian rouble, which reduced the value of imports, the decline in exports to Romania, combined with a reduction in remittances from Russia, further increased the current account deficit. In addition, the embargo on food products imposed by Russia in response to the signing of a trade agreement between the EU and Moldova, has further reduced Moldovan exports. In 2016, in a continuing weak economic context, the current account deficit will remain substantial. Official reserves have fallen and are likely to represent 3.7 months of imports, making the country increasingly vulnerable to external shocks.

Growing political instability in a complex environment

The government, formed in July 2015 and headed by Mr Valeriu Strelet, is facing an increasing level of political instability. Three pro-European parties came out as winners in the parliamentary elections in November: the Liberal-Democratic Party of Moldova (PLDM), the Democratic Party of Moldova (PDM) and the Liberal Party (PL), the latter being the most fervent backer of reforms on the European stage. The government has 55 out of the 101 seats, a majority enabling it to implement pro-European policies. However, in October 2015, the former Prime Minister and leader of the Liberal-Democratic Party, Mr Vlad Filat, was arrested inside Parliament on accusations of corruption and embezzlement. This arrest highlighted the growing political instability and social tensions, weakening the Strelet government. In this context, an early election could favour the rise to power of a pro-Russian government, impeding negotiations for EU membership.

The internal situation is further complicated by secessionist claims within Transnistria, a mainly Russian-speaking region of Moldova located along the Ukrainian border. The crisis in Ukraine has led to an intensification of Transnistrian claims for the recognition of its desire for independence. There are also “elections” planned in this region for 2016.

In the context of pronounced tensions, Moldova will continue to experience considerable poverty and a weak business climate. The country continues to perform poorly in terms of the granting of planning approvals and electricity connection. The Doing Business Report places the country 52nd out of 189. There are nevertheless improvements, in particular for starting a business.